Lenders often take into account an individual’s credit score and overall creditworthiness when approving personal loans. This makes it an almost insurmountable task for people with poor credit to qualify for a loan. There are, however, institutions that cater to this segment of the market, offering bad credit loans. This is usually a more expensive option due to the higher interest rates.
What does it mean to have Bad Credit?
It is important to have a positive credit history and score because they give lenders an indication that you will be a responsible borrower who pays back the loan on schedule. Factors that directly contribute to the credit score include education, employment, and work experience. Maintaining a good credit score becomes crucial when you need a big loan to purchase major assets such as cars and houses.
A credit score of 650 indicates that you are a high-risk borrower, which means that you will likely pay excessive interest rates on your loan. A score of 660 – 759 is considered good while 760 – 850 is rated as excellent. A history of on-time payments and minimal credit utilization will help to improve your credit score.
How to Get a Personal Loan with Bad Credit.
1. Check your Credit Report & Credit Score
The majority of lenders require a minimum credit score, which if not met could result in your application being denied. Financial institutions, however, provide free credit scores and a detailed analysis of your credit behaviour. Credit scores are calculated based on the information in credit reports. It is important to ensure the reports are accurate before putting in your application.
2. Get Prequalified
When seeking a personal loan with bad credit, it is important to engage several lenders so as to determine the loan terms and interest rates within your reach. Terms and conditions will differ from one lender to the other. Some may conduct a hard credit check, which temporarily lowers your credit score, but others will not. If you are denied the loan at one bank, talk to other potential lenders for a different opinion.
3. Look for a Co-signer
Ask a friend or relative with a good credit rating to co-sign for your bad credit loan. This will help in qualifying for the loan since the lender will base the loan terms on the credit score of the co-signer. In this arrangement, the borrower and the co-signer will share the repayment obligation equally.
As you look for a co-signer, he/she should not only have a good credit score but should also be in good standing with the borrower. Remember to make timely payments to avoid the need for a co-signer in the future.
4. Choose a Lender with Minimal Credit Score Requirements
With a low credit score, borrowers can take advantage of lenders who do not require them to disclose their credit history. Considering these lenders deal in high-risk loans, they charge exorbitant rates to cover their risk.
5. Compare Loan Options
A number of loans are available to people with bad credit. Once you have received several loan offers from various lenders, you will need to evaluate interest rates, lender fees and the length of time you are given to pay. Let’s review a few options:
a. Personal Loans
Banks, credit unions, and online lenders offer personal loans as instalment loans which may be secured or unsecured. A secured loan requires collateral such as a log book, which the lender may seize if you do not pay the loan. An unsecured loan, on the other hand, does not require collateral. As compared to title or payday loans, personal loans have lower interest rates and are therefore cheaper.
b. Payday Loan
A payday loan is a short-term loan that requires repayment by the end of your next pay period. Lenders who specialize in giving this type of loan do not typically look at your credit history or your credit score. A payday loan is usually capped at $500, has high-interest rates and requires one lump sum payment when due.
c. Peer-to-peer Lending
Besides traditional loans, peer-to-peer loans offer an alternative for borrowers with bad credit. The loans are financed by investors who make small loans to borrowers. Lenders on this platform do not check your credit history, making it available to those with bad credit scores. All the communication together with the disbursement of funds is conducted online.
d. Title Loan
People with bad credit may be able to obtain short-term loans through car title loans. They are much easier to obtain as the funds are secured by collateral. You can borrow anywhere from 25% - 50% of the value of the vehicle. The risk involved in taking up these loans is high since your vehicle will be repossessed if you fail to pay the loan.
Before taking out a loan, consider the terms of the loan such as total interest and the principal amount required for payment. Ensure you make timely payments to boost your credit score and avoid late payments as they will continue to impact your score negatively.